AMERICAN CONCERNS: MID-RUN ECONOMY

SERIES:
AMERICAN CONCERNS This Post is the second in a January Series
asking: About what problems are American intellectuals and
policymakers most worried? This Post treats concerns about the
middle run, particularly economic. Other Posts treat concerns about
the short run (140104), long run (140119), and China
(140126).

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WELCOME TO
NEW READERS AT THE CENTRAL PARTY SCHOOL! This Blog tries to provide
Chinese intellectuals and policymakers with leads to the best
analyses of American politics and policies, both by America’s
smartest media commentators and by America’s smartest social
scientists.

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AMERICAN CONCERNS: MID-RUN
ECONOMY

140111

The
previous Post (140104) noted American concerns about American
POLITICS. This Post turns to American worries about the American
ECONOMY. In 2008, a Financial Crisis broke out; energetic
government intervention quickly contained it. Since then, despite
generous monetary policy, Great Recession growth has remained slow
and unemployment high.

Conservatives claim the problem has been that government
intervention is counter-productive. Progressives claim the problem
has been that government intervention had been insufficient. At the
January 2013 annual meetings of the American Economic Association
(AEA), a main theme was worries about slow growth and what, if
anything, policy can do about it.

Overall,
is the USA (and much of the rest of the West) heading from an
abnormal period back toward a period of normal problems and
solutions? Or are we still stuck in an abnormal period that
requires still more abnormal solutions? That is the question this
Post tries to sketch, citing the recent views of several leading
economists.

In this
Post, the official HOPE that the USA is beginning to get back to
normal is represented by

economist
Ben Bernacke, the USA’s now retiring central banker. The unofficial
FEAR that things remain abnormal and may require abnormal policies
is represented by Lawrence Summers, who almost replaced Bernacke as
central bank head.

In the
background, stand two other pessimists toward whom Summers appears
to be moving. One is economist Paul Krugman, never an official but
always providing trenchant analysis and criticism from the
sidelines. The other is this Blog’s own economist Robert J. Gordon,
whom the others cite. (See his 130921, 130928, and 131005 Posts at
http://edwinckler.blog.caixin.com/
.)

One
suspects that what views these distinguished economists chose to
express is somewhat affected by their positions. As the USA’s top
economic official, Bernacke is almost obliged to remain calm and
somewhat optimistic. Having not succeeded Bernacke, Summers – like
Krugman and Gordon – is more free to “think outside the box.” In
any case, it can be difficult to compare their positions, because
each chooses to use his own terms.

In
practice, in 2014, the economy should continue its slow recovery.
Private demand appears to be resuming. On the public side,
evidently Congress is willing to spend a little more money and to
guarantee a little more fiscal stability. The USA economy may
gradually further distance itself from deep recession. But the
theoretical question remains, toward what new
destination?

Many
readers may find this Post not much fun. It presents gloomy
conclusions based on complex analyses in terms that are likely to
be unfamiliar even to those who know some basic economics. Sorry
about that! All I can say is that, in the real world, all of us
need to learn much new economics.

FROM ABNORMAL BACK TO NORMAL?

A main
thing that has made the Great Recession abnormal has been political
failure to complement strong central bank lending with strong
government spending. Nevertheless, some economists hope that, with
the right policies, the economy is fixable.

Fiscal
policy 1.1

Perhaps
the most straightforward diagnosis of the Great Recession has been
that it is really another Great Depression and must be combated as
such (Paul Krugman 2009 The return of depression economics and
the crisis of 2008 and 2012 End this depression now!,
both from Norton). Krugman followed 1930s Keynes in arguing that
the late 2000s economic problem, though huge, was only “technical”:
just a shortfall in demand that government could help make up. The
policy problem was that economists’ calculations showed the
shortfall (at least $1.5 trillion) to be greater than politicians
were willing to spend (under $1 trillion).

Moreover,
after a first (insufficient) fiscal expenditure, politicians became
unwilling to spend any more, depriving government of further fiscal
measures. That left government with only monetary policy, exercised
through the American central bank. Fortunately “the Fed” has much
autonomy from both legislature and executive, leaving it somewhat
free to pursue the best policies it can devise. Fortunately also in
the late 2000s the Fed was run by an economic historian who is
expert in how to combat crises like the Great Depression (Ben
Bernacke).

Monetary policy 1.2

The main
lesson Bernacke and others had drawn from the Great Depression and
earlier financial “panics” was the need to flood financial
institutions and the economy with as much money as possible as
quickly as possible (“liquidity”). One way the Bernacke Fed tried
to do this was by holding interests rates at near-zero for years,
which proved insufficient. Consequently Bernacke’s Fed experimented
with still more unorthodox measures. The main one was buying assets
to inject money directly into the economy (“quantitative easing”
). Another was to try to shape investor behavior by indicating
likely future Fed policy (“forward guidance”). Meanwhile the Fed
began inventing methods to more directly addressing the risk of
instability within the financial system as a whole
(“macroprudential tools”).

Under
Bernacke, the Fed did its utmost to restart the economy by
loosening credit. Meanwhile, in effect, Congress did its utmost to
undermine those efforts, not only by cutting government spending,
but also by disrupting economic stability through repeated budget
crises. The Fed has promised to continue low interest rates
indefinitely and to “taper off” its “quantitative easing” only as
fast as economic recovery permits. Heading into elections, Congress
may try to avoid dramatic budget crises, but will largely maintain
its counterproductive fiscal austerity.

Toward normality? 1.3

According
to Bernacke’s fine 140103 parting message (“The Federal Reserve:
Looking back, looking forward”), Fed efforts to increase its
transparency and accountability have increased not only its
economic effectiveness but also its democratic legitimacy.
Economically, things are beginning to look better, albeit too
slowly. Strenuous Fed efforts through monetary policy (flooding the
economy with money) remain undercut by stubborn congressional
obstruction of fiscal policy (refusing to spend money). Despite
these difficulties, the Fed has begun trying to “normalize” its
roles and strategies, including strengthening measures to prevent
future crises. Bernacke claims that the Fed has the tools necessary
to achieve this normalization without disruptions such as large
sales of its greatly expanded assets.

(See the
text at
http://www.federalreserve.gov/newsevents/speech/bernanke20140103a.htm.

Some
economists have explored the possibility that the Great Recession
is so abnormal that normal policies will take some time to fix it.
Others have explored the possibility that the economy is likely to
remain quite abnormal for quite a long time and might require quite
abnormal policies to fix.

Financial crises 2.1

One
influential analysis – by economists Carmet Reinhard and Kenneth
Rogoff – argued that what has made the Great Recession so bad has
been that, like the Great Depression, it resulted from a FINANCIAL
crisis. Relative to an ordinary business cycle, a financial crisis
creates deeper problems that take longer to correct: judging from
many historical examples, about eight years. For example, banks,
firms, and households need a long time to reduce the amount of debt
they hold relative to their assets (“deleveraging”). This financial
angle is illumining. But many details remain to be worked out (see
Kashyap’s remarks on the Bernacke panel). Moreover, risky finance
interacts with deeper contradictions in contemporary neoliberal
capitalism (see below).

In any
case, by early 2014 only the United States and Germany have
returned to their precrisis peaks of per-capita economic output.
The other ten Western countries affected are mostly still far below
their precrisis peaks and could eventually accumulate economic
losses greater than they suffered in the Great Depression. Even
more than in the USA, poor policy may be hurting. European
authorities are proceeding as though European economies can muddle
through by austerity and growth (contradictory), without applying
drastic measures such as debt restructuring, high inflation, and
capital controls.

(See their 2008 paper “Is the 2007 U.S. subprime
crisis so different? An international historical
comparison,” American
Economic Review, 98,2: 339-344. And their 2009 book This time is
different. And their recent paper “ Recovery from financial crises: Evidence from 100
episodes,” presented at the January 2014 AEA meetings and
forthcoming in American Economic Review Papers and
Proceedings, May
2014.)

“Secular stagnation” 2.2

Another
model recently readvanced is a 1930s American explanation of the
slow USA recovery from the 1930s Great Depression. Economist Alvin
Hansen then proposed a model of “secular stagnation” in which an
era of slower growth was caused not just by a temporary shortfall
in demand but also by permanent structural changes such as slower
population growth, the closing of the American frontier, and slower
technological innovation. Wartime recovery seemed to refute that
analysis and postwar Keynesians abandoned it. Nevertheless, to
explain the slowness of the 2008-2013 recovery, Lawrence Summers
has now revived it.

Like
Robert J. Gordon, Summers notes adverse structural changes that may
be causing stagnation and making the economy unresponsive to low
interest rates. Some changes parallel Hansen’s, such as slower
growth in population and productivity. Some are more contemporary
such as increased income inequality and decreased equipment costs.
Some result from the Financial Crisis itself, such as increased
risk aversion and increased financial costs. Like Gordon, Summers
claims that some of these changes began reducing the robustness of
American economic growth even before the Financial Crisis, already
in the early 2000s, perhaps even as early as the mid-1980s.

(See
Summers 131108 “Remarks at the IMF Fourteenth Annual Research
Conference in Honor of Stanley Fischer” [available on Youtube];
Summers 131215 “Economic stagnation is not our fate — unless we let
it be;” and Summers140105 “Strategies for sustainable growth” – the
last two both Opinion pieces in The Washington
Post.)

“Liquidity trap” 2.3

It is
significant that Summers has now joined the pessimists. Both
Krugman and Summers admire Gordon’s analysis of a possible slowdown
in productivity growth. Summers appears to be adopting Krugman’s
analysis of the USA as stuck in a “liquidity trap. (On the latter
convergence, see Krugman 131116 on his blog at The New York
Times.) Evidently Japan fell into a liquidity trap from around
1990. Now the US and EU have too. So it is worth noting this
strange concept, even though we do not have the space to fully
explain it.

A
liquidity trap is a standard analysis of a non-standard situation
in which even very low interest rates fail to revive an economy. No
matter how much money you pour in, it doesn’t help. The usual
relationships between interest rates and money supply, inflation
and investment become scrambled, even reversed. As Krugman says,
virtue becomes vice and prudence becomes folly. Wasteful spending
is better than no spending. Achieving full employment may require
bubbles (as since 1985). Bouts of high inflation may be necessary.
Trying to prevent future crises – even improving financial
regulation! – can be counter-productive. (See Krugman 131116 for
details.)

Arguably
this strangeness could greatly complicate American economic policy.
National leaders avoid confronting the American public with
economic concepts, even simple ones. They have been even more
reluctant to admit that the USA might be caught in something as
strange and scary as a liquidity trap. Many American politicians
refuse to use even basic economics to analyze economic policy,
preferring to moralize instead. Liquidity strangeness will give
them even more to deny and moralize.

总访问量：博主简介

韦爱德Edwin A. Winckler (韦爱德) is an American political scientist (Harvard BA, MA, and PhD) who has taught mostly in the sociology departments at Columbia and Harvard. He has been researching China for a half century, publishing books about Taiwan’s political economy (Sharpe, 1988), China’s post-Mao reforms (Rienner, 1999), and China’s population policy (Stanford, 2005, with Susan Greenhalgh). Recently he has begun also explaining American politics to Chinese. So the purpose of this Blog is to call attention to the best American media commentary on current American politics and to relate that to the best recent American academic scholarship on American politics. Winckler’s long-term institutional base remains the Weatherhead East Asian Institute at Columbia University in New York City. However he and his research have now retreated to picturesque rural Central New York.